Moreover, the dynamics of the market are such that a fast-paced style of trading can not only be effective but appealing. One such trading strategy is scalping. This article will answer the question “what is scalping” and explain why it could be the perfect way for you to play the forex markets. With that being said, here are the fundamentals of forex scalping.
What is Forex Scalping?
Forex scalping is the process of moving in and out of positions using the profit you’ve made from previous trades. The term scalping is one that’s taken from trading in general, but it’s particularly useful in forex due to the fast-paced nature of the markets. Indeed, the aim is to open and close positions several times per hour. This, in turn, allows experienced traders to move with the ups and downs of currency pairs.
This doesn’t mean forex scalping is an exact science. However, the nature of this trading strategy is such that you can ebb and flow in sync with market fluctuations. Doing this successfully allows you to make small profits from a lot of trades. Indeed, this is the core principle that drives scalping. Your aim isn’t to make a large amount of profit from a single trade. Instead, you’re aiming to take advantage of small market movements in order to scalp small profits from a large number of positions.
How Does Forex Scalping Work?
Forex scalping works on the basis that traders make multiple moves in a single day. This is possible because forex prices are based on small movements known as pips (i.e. digits after the decimal point). Scalping isn’t as effective in other types of trading because prices don’t move as frequently or significantly. However, in forex, there are micro-movements (i.e. pip movements) all the time. This is what scalpers focus on.
In many ways, scalping is similar to day trading. Day traders will take multiple positions in a single day and never carry a position overnight. Forex scalpers have the same strategy but over much shorter periods of time. In other words, instead of using five or 30-minute charts to execute traders, scalpers will use one-minute charters. These are also known as tick charts as they provide a constant stream of information about upward and downward movements (ticks).
Forex scalpers will watch tick charts and try to capitalise on upward movements with long positions and downward movements with short positions. There are movements throughout the day, but the most significant will be when the markets reopen, when news about a currency pair/its associated countries drops, and just before the markets close. Traders using this strategy will be particularly active during these times.
However, as a general rule, they will watch tick charts throughout the day and aim to make a small profit on each trade. The average target for most forex scalpers is a profit of between five and 10 pips per trade. For example, if they’re going long on the forex pair EUR/USD and the price moves from $1.3456 to $1.3466, they’d close the trade and take a 10 pip profit (1.3466 – 1.3456 = 10). In real terms, this would equate to a $100 profit because, in a standard forex lot, a pip is worth $10.
Why Should You Choose Forex Scalping As Your Trading Strategy?
Scalping can be a profitable forex trading strategy. However, you need the right amount of experience, the right tools and, importantly, the right personality for it. The best forex scalpers are people who don’t mind taking risks, processing a lot of data in a small amount of time and are willing to spend long periods in front of their computer (or mobile).
Timing is also important. You can’t afford to wait. Currency prices can fluctuate five pips or more in a matter of seconds and this can mean the difference between a profit and a loss. So, you have to be experienced enough to spot patterns and be ready to react accordingly.
Put simply, you have to be comfortable with the financial and emotional swings of trading because you’ll go through multiple cycles multiple times per day. Scalpers can experience the emotions a stocks trader will experience in a week in less than an hour. Therefore, if your personality isn’t suited to this frenetic style of trading, scalping isn’t for you.
The Advantages of Forex Scalping
If you are cut out for scalping, some of its main advantages are:
- Scalping can be manual or automatic. The latter allows you to use sophisticated trading software that will open and close positions for you based on pre-set variables.
- Scalpers use leverage. This means you don’t need a large amount of capital to start which, in turn, means the barriers to entry are lower than other types of trading, including things such as investing in stocks.
- Forex has high liquidity and the market movements are such that they’re perfectly suited to this style of fast-paced trading.
- Losses can be cancelled out fairly quickly because you’re making multiple trades per hour. Of course, the converse is also true in that a profit can be quickly nullified.
- You don’t have to wait for long periods of time to realise your profitable moves i.e. you can lock up a profit on a daily basis because you’ll never hold overnight positions.
The Risks of Forex Scalping
The main risk with scalping as a trading strategy is that you can’t handle the pressure because it doesn’t suit your personality. Other than this, the risks of scalping are:
- This strategy as a whole is risky because you’re playing with small margins and micro movements.
- A large loss on a single trade could wipe out a whole day’s worth of profit.
- You need to be on the ball. Missing a trade by a second or two can cost you money.
- Because you’re using leverage, losses can be magnified just as much as profits can be magnified.
Why Do Traders Use Forex Scalping As a Strategy?
Scalping is popular with traders because it’s in tune with the dynamics of forex. Although forex traders do hold positions for extended periods of time, it’s more common to see them move in and out of trades at a rapid pace. This sits in contrast to something such as investing in stocks. In fact, this cuts to the core of the distinction between trading and investing. As a general rule, investing is the process of buying the underlying asset with the aim of holding it for a long period of time and making a profit when its value increases.
In contrast, trading is characterised by speculating on the price movements of an asset rather than owning it. This makes it possible to take long positions (you make a profit when the price increases) or short positions (you make a profit when the price decreases). Forex prices change so quickly that, in general, it’s not a good idea to hold positions for too long. That’s why day trading and scalping are popular in these markets.
How Can I Scalp Forex Currency Pairs Online?
You can start scalping forex by following the steps below:
- Read our online broker reviews to find a suitable forex trading site.
- Create an account, verify your identity and make a deposit.
- Download the broker’s trading platform (for example, MetaTrader 4).
- Find a currency pair that offers high liquidity such as EUR/USD or GBP/USD.
- Decide on the amount you want to trade in a given session and use the platform’s tick charts.
- Watch the charts, review the data and start scalping. Alternatively, get some scalping software, set your variables and let it execute trades on your behalf.
Start Scalping Forex Today
Forex scalping can be a great way to play the markets and ride the fluctuations currency pairs are known for. It’s not a risk-free trading strategy and you have to be a certain type of person to attempt it. However, if you’re someone that thrives on pressure and doesn’t mind jumping from position to position in search of incremental profits, scalping is fantastic.
Indeed, other than being a potentially lucrative way to trade, it’s interesting. Of course, that doesn’t mean you should be reckless, spend more than you can afford or abandon the fundamentals of trading. However, if you’re prepared to do the necessary research, study the data and stick to a budget, forex scalping can certainly be worth the time invested.